Red flags which expose a critical vulnerability in Scotland’s economy

The latest reports on the state of Scottish business make grim reading | PA

Thank goodness for Marmite- and cheese-flavoured oatcakes.

If it were not for their launch last year, as well as growth in sales of existing products, business at iconic Scottish oatcake maker Nairn’s would not have been quite so healthy.

To understand why, look at this week’s read-outs on the state of Scotland’s businesses. They can be summed up in one word: grim.

A quarterly survey of Scottish businesses by insolvency and restructuring firm Begbies Traynor revealed a patient on life support with “levels of distress [ …] accelerating faster than across the UK economy as a whole”, according to Thomas McKay, the firm’s managing partner for Scotland.

“The fact that every single industry sector saw year-on-year rises in the earliest signs of distress, despite the fourth quarter traditionally being strong in retail and hospitality, which is highly unusual, is a very bad sign of things to come in future months,” he said.

A separate report from UK accountancy body ICAEW revealed that business confidence in Scotland had slumped to its lowest level in more than three years.

Some clues come in Nairn’s latest annual report, also out this week. The Edinburgh-based company, which is privately-owned, managed a 23 per cent rise in pre-tax operating profit to £4.9 million. This sounds impressive, and it is. But there are three caveats. First, the reporting period covers the year ending May last year. That’s only a month after Trump’s tariffs started causing mayhem for many Scottish exporters, as the Scotch whisky industry knows to its cost. The real effect of such disruption will not be seen until January 2027 when Nairn’s posts its next set of numbers at Companies House.

Second, Nairn’s raised prices selectively even as sales rose. This is of course the sweet spot for any consumer goods business. But brands are in hand-to-hand combat with supermarket own-label products, and with a persistent cost of living crisis there are limits to how far price rises will stick, especially if raw material costs remain as high as they are.

It gets worse if inflation persists, too. Judith Cruickshank, Scotland board chair at RBS, says that with inflation continuing to pressure companies and customers, the latest data in the bank’s RBS Growth Tracker for December “showed steeper increases in input prices at the end of the year, suggesting that margins are tightening”.

Third, a raft of tax and wage cost increases emanating from changes in UK government policy are yet to show up fully in Nairn’s numbers. Indeed, the company warns in its annual report that the increase in employer national insurance contributions, which kicked in in April last year, “will have a more pronounced impact in the next financial year”.

Sensibly, therefore, Nairn’s warns its stakeholders that there is “still significant uncertainty in the business environment with continuing geo-political tensions, cost pressures, and a domestic environment characterised by low growth and stubbornly high inflation”.

Unfortunately, all of this is already the brutal reality for Scotland’s businesses – hence this week’s grim data. But it is particularly tough for the many privately-owned small- and medium-sized business (SMEs) that make up the bulk of Scotland’s business ecosystem.

Callum Carmichael, restructuring advisory partner in Edinburgh at business advisory firm FRP, says: “It depends on the sector but anything that’s heavily employee-related, be it construction, manufacturing and particularly hospitality and leisure, is affected.”

Callum Carmichael, partner with FRP | contributed

Their pain may not be visible because they don’t report numbers like larger family-held concerns and publicly listed companies. Yet the share of such SMEs in the ecosystem is now at such a level to suggest that this week’s data expose a critical vulnerability in Scotland’s economy.

In a “State of the Nation” report on entrepreneurship published last month by the Fraser of Allander Institute and the Hunter Centre for Entrepreneurship, Strategy and Innovation at the University of Strathclyde, researchers found that the number of businesses with no employees almost doubled in the 25 years since 2000, accelerating sharply after 2020. This was due to the pandemic-driven shift toward self-employment and freelancing as people established home-based enterprises. By contrast, businesses with 1-49 employees showed steady, if modest, growth throughout the period.

In that context, a trend is emerging that’s worrying business advisors – and should worry the UK and Scottish governments too: entrepreneurs turning to non-traditional lenders to keep afloat, tapping them for unsecured loans based on personal guarantees.

McKay says: “Some of these [company] directors are going to smaller tier funders for quick solutions and they’re just signing up to personal guarantees, willy-nilly, without really understanding the context of why they’re doing it.”

One result is that private equity buyers are circling distressed assets, including at larger businesses. A survey by FRP last month showed that one third of Scottish manufacturers were preparing to sell part of their businesses this year due to the sudden loss of key orders or customers and “geopolitical or trade changes”.

The startup scene is also a source of concern. Angel investors in Scotland have for some time been drawing in their horns as businesses to which they have committed are taking longer than expected to generate revenues.

Carmichael at FRP says he has had increasing contact in the last 8-9 months from startups in parts of the tech sector, triggered by investors drawing back, worried about a startup’s failure to meet technology development deadlines or not getting to the commercialisation stage as originally hoped.

He points out that company directors have to recognise they are in difficulty early and seek help, “because if you don’t, then burying your head in the sand doesn’t fix the problem and it only gets worse.”

It’s advice that policymakers should heed, too.